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HTC at a loss: Where does it go from here?

Its moment as rising star came and went like that. Now its first loss in a decade adds urgency to HTC's quest to find its way again in a world dominated by Apple and Samsung.

The HTC One (right) and its baby brother, the HTC One Mini.
The HTC One (right) and its baby brother, the HTC One Mini. Josh Miller/CNET

HTC has lost its way, and it's increasingly clear that it's grasping for straws.

The latest in what has been a steady stream of bad news for the Taiwanese smartphone maker comes courtesy of its third-quarter results, in which it posted a loss for the first time since going public in 2002.

The results underscore what has been a difficult time for HTC, which finds itself too small to compete with the likes of Samsung and Apple despite products that arguably stand toe-to-toe with the top-of-the-line iPhone or Galaxy S smartphones. HTC is clearly getting squeezed, and there doesn't seem to be a way out. Given the number of ill-conceived partnerships and initiatives over the last 12 months, it's clear HTC doesn't really know where to go either.

"The sands are shifting quickly underneath the feet of HTC and the sharp rate of share loss has been exacerbated by the reduced brand power," said Mark Sue, an analyst at RBC Capital. "For the most part consumers have equated Galaxy with Android and many purchase decisions are made even before the customer walks into a store."

As HTC posted a loss of $101 million for the quarter that ended September 30, Samsung Electronics said on the same day that it expects record profits of $9.3 billion for the third quarter. Samsung's numbers, however, mask some of the cracks found on even a dominant player in the segment; smartphone sales have slowed and its profits were driven more by a rebound in its chip business.

But Samsung's record profits in spite of a maturing smartphone business highlight a problem that HTC faces: as a pure smartphone manufacturer, it has nothing else to turn to when its core business takes a hit.

And where Samsung has been able to throw a large fortune into marketing and advertising, HTC just hasn't been able to compete.

Comedy of errors
HTC has gone through a long stretch of strategic misfires and gaffes that have hamstrung any chances of a rebound.

Over the last 12 months, the company unwisely decided to throw significant support behind Microsoft in the form of its ill-selling Windows Phone 8X and 8S smartphones; followed up with the equally poor decision to partner with Facebook on the HTC First; and opted to sign on Robert Downey Jr. as a pitchman in an ineffective campaign.

Even headphone maker and longtime partner Beats rushed for an exit, buying out HTC's stake in the company and parting ways, ending an alliance that many scratched their heads trying to figure out in the first place.

No one could figure out why this partnership existed: HTC CEO Peter Chou and Beats exec Jimmy Iovine together. Sarah Tew/CNET

Now comes talk that Microsoft is trying to lure HTC into a deal that would bring Windows Phone to its Android devices, allowing its phones to boot up either operating system in exchange for discounted or even waived license fees. While it certainly looks attractive to HTC, it looks to be another doomed partnership.

All of this equates to a company flailing its arms, seemingly without a clue on its next step.

Its one bright spot, the actual HTC One itself, was hampered by early delays, similar to last year's predecessor, the HTC One X, which was held up because of a dispute over patents.

Which is the biggest tragedy, because HTC makes some great phones. The all-metal One features a design and body that stands right up there with the iPhone 5S, and makes rivals such as the Galaxy S4 feel cheap.

A mixed track record
Indeed, HTC has a solid track record of smartphones and was keen on jumping on trends, going back to the first Android smartphone, the G1, to the first WiMax smartphone in the Evo 4G for Sprint, and the first Verizon Wireless LTE smartphone in the Thunderbolt. Even before the G1, HTC made a name for itself by customizing and simplifying what had been a cumbersome Windows Mobile experience.

Its early Android smartphones were highly coveted, pairing a yet-unpolished Android operating system with its beloved Sense user interface. At one point, HTC was positioned to have a flagship smartphone at nearly all of the national carriers, evidence that it had arrived from its humble start as a manufacturer of carrier-branded smartphones (also known as white-label devices).

Verizon's flagship Droid DNA.
Verizon's flagship Droid DNA was a high-profile flop that launched late last year. Sarah Tew/CNET

But HTC didn't handle success well. Just as HTC appeared poised to break out, it began to stumble. Supply constraints hit popular phones such as the Droid Incredible. It expanded its line up too aggressively, diluting its focus and ending up with half-baked devices such as the first unofficial "Facebook phone," known as the Status in the US and the Chacha overseas.

Even as it attempted to slim down the product line with its One family of smartphones last year, it couldn't help but create variants such as the Evo 4G LTE for Sprint and Droid DNA for Verizon.

By the time it moved to a single hero product in the One in February, much of HTC's brand awareness had deteriorated. It finally managed to get all of the carriers on board -- with Verizon arriving to the party a little late -- but at that point the Galaxy S train had taken off. It didn't help that HTC faced delays in getting the product out to the market, shortening its window where it could run unopposed.

Changing the conversation
When the Galaxy S4 was unveiled in March, the HTC One was buried by the marketing blitz.

HTC had talked about getting more aggressive with its marketing, but its limitations have been painfully exposed when stacked up to the all-out assault by Samsung. The company also talked about being smarter with its marketing, targeting users through social media and specialized campaigns.

Unfortunately, that hasn't helped HTC from a mainstream perspective. While the One may have its fans, it clearly isn't a broad enough base to lift its financial results.

As Sue noted, consumers have learned to equate Android with Galaxy. That leaves little room for Android competitors, and puts the onus on a company like HTC to change that general perception.

HTC has talked about being more aggressive, but hiring Robert Downey Jr. in a confusing campaign isn't the way to go about it. While Samsung has its own stable of celebrities, it won over consumers with smart commercials that simultaneously needled rival Apple while highlighting the benefits of its Galaxy S phones.

HTC showed a bit more teeth during the Galaxy S4 launch, sending representatives to hand out chips and bottled waters to weary Samsung fans, gadget enthusiasts, bloggers, and reporters waiting in line for the event to start, and then jumping on slamming the event and phone.

HTC executives need to step up their game even more. The company's products are solid, but consumers haven't really given it a shot because its brand is so far off the radar now.

Perhaps that changes with the rumored HTC One Max, a jumbo smartphone designed to compete against Samsung's Galaxy Note 3.

Or perhaps HTC finds a deep-pocketed ally that could shore up its weakness on the marketing front. With Microsoft tied up with Nokia and Google linked to Motorola, that leaves fewer dance partners out there. But Chinese manufacturers Huawei, ZTE, or even Lenovo could use HTC's relationship with the US carriers and what's left of its brand to make a bigger dent here.

Sue suggested narrowing its scope further and going after a niche audience.

HTC's latest results raise a lot of questions about the future of the company. At this point, will there be an HTC Two? I would like to see one, although I fear the worst.

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